Let's really look at free trade

In nearly 30 years as a nutritionist, I've done a great deal of international work. Recently, a well-connected Mexican feedlot client called to say he was initiating a suit against the U.S. It's blatantly obvious, he said. American cattle buyers bid Mexican feeder cattle beyond what I can pay, ship them north, then send them back as boxed beef, which is sold at prices below what I can produce beef

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In nearly 30 years as a nutritionist, I've done a great deal of international work. Recently, a well-connected Mexican feedlot client called to say he was initiating a “dumping” suit against the U.S.

“It's blatantly obvious,” he said. “American cattle buyers bid Mexican feeder cattle beyond what I can pay, ship them north, then send them back as boxed beef, which is sold at prices below what I can produce beef for!”

It's easy to see why a Mexican cattle feeder would think this way. In Mexico, one person typically owns the cattle, feedlot and packinghouse. I explained to him that, in the U.S., each is owned independently.

In the U.S., it's quite common for a cattle feeder to buy feeder cattle at too high a price and lose money. Mean-while, a custom feedlot can charge for its services and make money, while the packer often buys cattle at a breakeven or loss to the feeder, but can still sell the meat at a profit.

Being an intelligent, reasonable man, my client understood. Not everyone is as open-minded.

Prior to passage of the North American Free Trade Agreement (NAFTA), I had opportunity to speak about free trade on both sides of the border. In the U.S., I was often harangued with, “How can we tear down barriers with a country with such cheap labor? They'll kill us with their low wages!”

Conversely, Mexican audiences would shout, “How can we align ourselves with a country so technologically advanced? They'll destroy us with their technology!”

A mutual benefit

In actuality, NAFTA has been good for both countries. Go to any northern Mexican industrial city and you will find Wal-Mart, Holiday Inn, Burger King and a plethora of other American logos and icons. This illustrates a NAFTA truth — a large proportion of the money that goes south (or north) of the U.S. border, comes back as investment or to buy U.S. goods.

Mexico exports 1 to 1.5 million calves to the U.S., and imports about the same dollar equivalent in meat. Much of what Mexico imports, however, is “variety” meats (kidneys, tripe, rumen, thymus glands, etc.), which have virtually no U.S. market. This increases the “drop” value of U.S. slaughter cattle, which translates into higher live-weight prices.

The situation with Canada is more lopsided. Canada ships more cattle and beef to the U.S. than it imports. This has caused R-CALF to use the BSE situation as a non-tariff trade barrier.

Indeed, the closing of the Canadian border in 2003 clearly pushed up our fed markets. Long term, however, it's not in our best interests to create artificial barriers against the Canadians.

Why? To begin with, historically, feeder cattle from the Northwest (Washington, Oregon and Idaho) have had a negative basis. If fed in the Northwest, these cattle had to be shipped hundreds of miles to a U.S. packer.

More recently, IBP built a plant in Pasco, WA, which added several dollars/cwt. to Northwest calf prices. However, this plant also killed a great number of Canadian cattle and reportedly will close if the border doesn't open soon.

But, beyond calf prices to Northwest ranchers, the reality is that in trade, there is no unilateral action. Canadians realize BSE is an extraordinary situation and haven't retaliated. Should a border closure become permanent, however, it would be naive not to expect trade sanctions from Canada.

Just as we retaliated against Europe for banning U.S. beef (due to implants), we can expect Canadian restrictions on U.S. goods. Canada imports an enormous amount of manufactured goods — cars, trucks, machine tools, etc. These, in turn, support American factory jobs, which support beef demand.

Everything is interrelated

In trade, everything is interrelated. History's worst market crash occurred in the 1930s. Protectionist politicians passed the Smoot-Hawley Tariff Act to protect the U.S. textile industry, which triggered a world trade war and turned a recession into the Great Depression.

Conversely, when free trade is allowed to flourish, the opposite happens, as illustrated by Korea, Taiwan and Mexico. By selling their goods in the U.S., these countries raised their living standards, which created a healthy demand for U.S. beef.

It's our innate responsibility to understand what free trade really is. Free trade is the 180° opposite of war. Prior to “constructive engagement” by the Nixon administration, the U.S. worried about China attacking us with nuclear weapons. Today, we worry that China ships us too many tennis shoes and hand tools.

All wars are said to be economic, which is fundamentally true. World War II was the result of Japan and Germany throwing off the lingering effects of the Great Depression. This is something we must never lose sight of. At this very moment, many of the problems we face today are due to depressed economies in much of the Arab world.

In free trade, there are winners and losers. In the U.S., a loser is an industry that requires intensive amounts of manual labor. These industries will move to Third World countries where cost of production is less.

The move reduces the cost of the product to consumers, and develops the economy of an impoverished nation. That, in turn, creates a demand for more technologically advanced goods from developed countries (including beef).

It's true that workers who lose their jobs undergo hardship and must retrain for more sophisticated employment. But, that's far better than economic stagnation.

Back to beef

Feedlots have become the beacon of technology for the beef industry. Individually, they hire consulting veterinarians, nutritionists, computer experts, etc., to lower their production costs. Collectively, they have banded together in trade associations to aid in marketing.

Recognizing the value of foreign markets (and free trade), they have worked through the National Cattlemen's Beef Association (NCBA) and the American Meat Institute to open new markets (or reduce tariffs). Cattle-Fax economists estimate that foreign markets add $10-$15/cwt. to fed-cattle prices.

But, many ranchers feel that because feedlots have become actively involved in NCBA, the organization doesn't represent them anymore. Hogwash.

Increasing the value of a fed steer directly increases calf prices. What feedlots pay for feeders is a pure function of breakeven, and (aside from interest) there are only two factors that make up breakeven — feed costs and slaughter prices. If slaughter values move up and feed prices remain constant, feedlots will bid feeder cattle higher. It's that simple. Foreign markets are in everyone's best interest.

Having said that, not every NCBA action pleases me. I'm tired of NCBA telling my rancher clients they must retain ownership to get the true value of their cattle (see sidebar on page 48).

But, because NCBA does some things we object to, it does not mean we should abandon it. I don't like many tactics used by the National Rifle Association, but without the group I know my hunting rights would be in grave jeopardy.

Likewise, the efforts of NCBA overall are a net positive.

Conversely, R-CALF is working against the industry. Suing the packers over captive supply accomplished nothing, but siding with Carol Tucker Foreman and radical consumer groups is an outrage to anyone of intellect.

If R-CALF wants to work against free trade, let them line up with the labor unions, and express their political opinions. But, suing USDA and claiming the health of U.S. citizens was put at risk by allowing the importation of Canadian beef not only erodes consumer confidence in our product, but is an obscene distortion.

I'm not an apologist for NCBA, but having worked all over the world, I know free trade works to everyone's benefit. That's a lot more than can be said about R-CALF.

The retained ownership lowdown

The National Cattlemen's Beef Association (NCBA) provides valuable services to ranchers. Telling ranchers they must retain ownership to fully benefit from their cattle's genetics isn't among them.

To begin with, our grading system does not identify the best cattle (carcasses). It's a dinosaur designed in 1916 to differentiate grass-fed Texas Longhorns from corn-fed English cattle. Beyond that, genetics has very little to do with feedlot profitability.

Although NCBA and cattle feeding groups don't like to discuss it, there are a great many high-income “investors” in cattle feeding. These people literally don't know a steer from a heifer; they feed cattle through agents. This is most likely why live cattle futures are typically sold off at a breakeven.

While a lot of small farmer-feeders complain about this situation, it's actually good for ranchers. It keeps feeder-cattle prices at maximum breakeven levels. The reality is that when a rancher sells yearling cattle, in most cases, the maximum profit is already in them. (If additional money is to be made, it typically requires delayed hedging or gambling on the cash market.)

For a rancher to truly profit from the genetic value of his cattle requires entering into some sort of alliance that markets direct to the wholesale or retail trade. In that case, they're faced with enormous competition from mainstream packers that claim to have comparable quality (based on USDA grades) at a cheaper price. In reality, USDA grades don't measure tenderness in any objective manner.